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A Total Cost Approach to Understanding Supply Chain RisksExecutive Summary MemoFirst Second NameUniversity Name
A Total Cost Approach to Understanding Supply Chain RisksExecutive Summary MemoMEMO TO: Jim Heskett FROM: DATE:SUBJECT: Reducing Supply Chain Risks Using a Total Cost ApproachIn our consideration for reducing supply chain risks of piracy at sea, uncertain delivery schedules, disruptive weather patterns, unique tariffs and duty issues, we should consider a total cost approach. The following analysis and recommendations are based on the money and time it would take to have the shipments delivered to Innovative domestically from our supply unit CousinsAg in Wahoo, Nebraska, and internationally, from Dong Hai supply unit at Chengdu in China. The idea is to go for a total cost approach and have the best solution. Let us examine the scenarios for the same.For all calculations, 1 USD = 6.88 Chinese Yuan (which is today’s rate).First, we will determine the INITIAL PURCHASE COST PER UNIT (in US Dollars) paid to Dong Hai Supply? It does not include transport costs. We know Dong Hai’s supply price is ¥547 per unit. Since, this figure does not include transport costs, in USD, we have 547/6.88 = $79.505 per unit that has to be paid to Dong Hai supply.Next, we will calculate the average time for an order filling a TEU container to come from Dong Hai Supply in Chengdu, China to IDC's Alliance Fort Worth Distribution Center., and then From CousinsAg in Wahoo, Nebraska to IDC's Alliance Fort Worth Distribution Center? The timelines for both domestic and global supply unit is shown below. For Supply of container from Dong Hai to IDC AFW unit, the average time is 43 days. For supply from Cousins Ag to AfW, the supply time is 15 days. See Figure 1for more details. Next, we need to know the cost (in US Dollars) to ship a TEU container from Dong Hai Supply in Chengdu, China to IDC's Alliance Fort Worth Distribution Center? Since, Interface Exporting Company charges ¥12,414.5 per TEU, that turns out to be $1804. The total cost per TEU comes at $4379 if the product is shipped from China. See Figure 2for more details. A very important parameter in having a total cost approach is to understand the concept of “Economic Order Quality”. This is the most economical order that we need to ship from our supplier to have an inventory holding cost advantage. Luckily, the formula for economic order quantity (EOQ) is available as:EOQ Sq. Root of (2CoD/UCi) where Annual Demand D = 21500, Carrying Cost Ci= 0.32, Co= cost of order = $182 for Dong Hai, $105 for CousinsAg. U = Per unitcosts = $2195 for Dong Hai, $1850 for CousinsAg. Therefore, EOQ (Dong Hai) = 106And EOQ (CousinsAg) = 87.